Rio wary on recovery but it shrugs off China fears

In a hole: the commodities slump has hit the world’s third-biggest miner, which suffered a 63.7% dive in profits

Rio Tinto today warned it remains "cautious" about the recent rally in metal prices as the mining giant tried to shrug off fears that its relations with commodities-hungry China are deteriorating.

Four staff were arrested last month in Shanghai on charges of commercial espionage and bribery. The law firm representing two of the executives said yesterday that the investigation could last two months.

The Anglo-Australian miner is also in a stalemate with steel mills in China about how much it will charge for iron ore.

Rio has offered to slash prices by a third, but it has refused to cut prices by as much as Aussie rival Fortescue Metals Group, which earlier this week struck a deal with China. But chief executive Tom Albanese said that despite all the problems in China, iron ore sales remain at capacity.

It came as Rio exposed its wound from the commodities slump, posting a 63.7% plunge in profits to $2.7 billion (£1.6 billion) for the first six months of the year.

Revenues at Rio, the world's third-biggest miner, dived from $30.5 billion to $19.5 billion as the prices of copper, iron ore and aluminium remain significantly lower than two years ago.

Albanese said he was "pleased" the charges made against its employees were not as serious as first thought. The arrests have caused a diplomatic row between Australia and China, with Australia's resources minister Martin Ferguson currently in China to discuss the case.

Analysts criticised the company for providing "very limited" guidance on outlook, in comparison with past statements which have offered far more details on expectations going forward.

Chairman Jan du Plessis said: "The expectation that emerging markets will generate underlying strength in metals and minerals demand over the long term remains broadly unchanged."

The bottom line also took a $195 million hit from Rio spurning a tie up with Chinese state-owned group Chinalco.

Albanese said Rio may yet launch another joint venture with the group: "We were disappointed that we couldn't come up with an agreement with Chinalco, but we are in discussions, which are at early stages, about possible deals in the future."

Rio instead turned to a cash call and iron ore joint venture with BHP Billiton, whose takeover bid at £56 a share it spurned last year. Its shares were changing hands at 2342½p today, up 30½p. Albanese said detailed agreements are being drawn up with BHP Billiton and should be finalised by mid-2010.

Rio, which was grappling with debts of $39.1 billion from its ill-fated acquisition of aluminium producer Alcan in 2007, has cut its debts by $14.8 billion thanks to its mega rights issue this year. The sale of the bulk of Alcan Packaging for $2 billion this week will take another chunk out of the debt mountain, but Albanese said is looking to sell off further assets.

Rio is also slashing costs in response to the downturn and said it is on track to cut costs by $2.5 billion by 2010.

Its aluminium arm continues to struggle, sinking into the red by $689 million for the six months.